In his Market Wizards interview, Jack Schwager asked Marty Schwartz "Why do most traders lose money?"
Schwartz: "Because they would rather lose money than admit they're wrong. What is the ultimate rationalization of a trader in a losing position? "I'll get out when I'm even." Why is getting out even so important? Because it protects the ego. I became a winning trader when I was able to say, "To hell with my ego, making money is more important.""
In other words, if you approach the markets in a systematic manner and get an exit signal, honour it. Do NOT allow a small loss to potentially become a big loss. Keep as much of your equity intact as possible, to benefit from future profitable signals.
Remember that even the most successful traders and investors are frequently wrong on individual positions. My own statistics show I am right only 50% of the time - this has been the average for several years. What I do ensure though is that my average loss is much smaller than my average profit, creating the overall positive expectancy. Once again, the old adage of cutting losses and letting profits run. Read this post on keeping your ego in check.
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